The relationship between corporate governance and firm profitability among JSE-listed basic materials sector firms

Résumé

The spate of failures and scandals in the basic materials sector in South Africa and globally bring into question not only the ethics of business leaders but primarily corporate governance and the role of boards in safeguarding the shareholders' wealth. The aim of the study was to ascertain the relationship between corporate governance and firm profitability of firms in the basic materials sector listed on the Johannesburg Stock Exchange. Five corporate governance characteristics are observed on two profitability measures, return on assets and return on equity and Tobin’s Q as the market indicator using a cross-sectional time-series panel data method of 54 firms in the basic materials sector listed on the JSE from 2017 to 2021. A regression analysis model is used to ascertain whether and to what degree a relationship exists between corporate governance and firm profitability within JSE-listed basic materials sector firms. The results show that corporate governance characteristics have a mixed impact on firm profitability, with some indicating a negative or no significant relationship, highlighting the complexity of this association. This study proves that if a firm chooses suitable corporate governance characteristics, the profitability of a firm can be enhanced. The outcome of this study should have implications for academic thoughts for further research on this subject and calls for a more concerted effort for boards to implement more prudent corporate governance mechanisms to future-proof the business of the basic materials sector.

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